For Sale £400,000
Various options available for development land
Published February 21st, 2017
Landowners who are unable or unwilling to fund planning costs due to risk commonly seek a development partner to fund the planning cost who in takes a share of the consequential increase in value of the land.
Such arrangements can apply to any form of development be it commercial, residential or a renewable project and historically such arrangements have comprised of an Option whereby a developer can buy the consented land at a discount to agreed market value once planning permission is granted.
They remain popular for development businesses which build out planning consents but lack a supply of sites. However, Chris Jones, partner with Berrys, Shrewsbury says landowners can find such arrangements unsatisfactory when looking back upon a project.
“First, the determination of value of the consented land is by agreement and not market tested thus no guarantee can be given that the very best price was achieved,” Chris said.
“Second, landowners have often gained a personal relationship with the developer during the planning process but mutual interests stop and the relationship turns confrontational when seeking to agree the price.”
Thirdly, the advent of ever more expensive Section 106 obligations – site-specific agreements between local authorities and developers attached to a planning permission – can leave the landowner feeling that the developer agreed whatever the local authority requested just to get a consent knowing that the full cost of the section 106 will be borne by the landowner.
“The inclusion of a minimum price provision in the Option can provide some mitigation to this concern but nevertheless the perception can remain,” Chris said.
To meet these concerns the market has developed a new structure called a Promotion Agreement whereby the landowner’s development partner is not a developer but a planning specialist.
“Rather than the value of the consented site being determined by agreement, it is determined by a sale of the property on the open market,” Chris explained.
“The land promoter is still rewarded by a proportion of the sale value but their interest in the land stops there i.e. on sale. There is no ongoing interest with developing out the site. The concerns with an Option of financial probity with price determination, business relationship and excessive section 106 obligations are all mitigated.”
Developers who have the intention of building out sites are starting to offer hybrid agreements, these break the consented site into several phases which are offered alternately on the open market and bought by agreement by the developer. The price achieved on the former informing of the negotiations on the latter.
“Landowners with potential development land who are wishing to avoid exposure to the high costs associated with planning therefore have an array of structures available to them and need to carefully assess the opportunities in the market and the most suitable structure for their land,” he added.
For further advice contact Chris Jones at Berrys, telephone 01743 267063, email email@example.com